1. The government was shut down for 16 days; Treasury almost defaulted on its debt.
2. Fitch put U.S. credit rating on negative watch.
3. Government re-opened, but we have a few more months before we GO THROUGH IT ALL OVER AGAIN!
4. Dollar index breaks below 80; Following the worst week in a month, the US$ gets slammed to the lowest levels since February
5. The NAHB housing index fell to 55, from 58 in September.
6. UK still dealing with sticky inflation as September CPI up 2.7%,
7. MBA refi apps 60% off of the peak in May
8. Of 99 companies in S&P 500 reporting Q3 earnings Only 38% are exceeding revenue estimates vs 45% in Q2.
9. Initial unemployment claims came in at 358k v expectations of 335k.
10. Empire manufacturing index fell to 1.52 in October, down from 6.29 in September.

MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - October 13th - October 19th

It’s become almost cliche these days to point out how many governments are broke beyond belief.

In Japan, where the country’s debt level already exceeds 200% of GDP, the government has to finance 46% of its budget by issuing more debt.

In the United States, the governments add a trillion dollars each year to the already unsustainable debt, and fails to collect enough tax revenue to cover mandatory entitlement spending and interest payments on the debt.

The theater playing out in the US right now is irrelevant. America’s debt challenge is not a political problem. It’s an arithmetic problem. Same in Japan and most of Europe.

However, most of these ‘rich’ western nations aren’t doing anything about it. It’s business as usual, and their debts are only getting bigger.

Poorer countries don’t have this luxury of kicking the can down the road and delaying the inevitable. They must face their financial reckoning now.

In some cases, like Cyprus, they resort to plundering people’s savings. Or Argentina, where the government nationalizes everything that isn’t nailed down.

Others are falling back on more creative measures.

Puerto Rico, for example, is in the midst of its own epic debt crisis. It’s gotten so bad that the commonwealth has effectively been shut out of the bond market.

So last year, the government of Puerto Rico codified a number of special incentives aimed at attracting wealthy foreigners, particularly from the United States.

Puerto Rico’s tax agreement with the US government allows US citizens who are resident in Puerto Rico to pay only Puerto Rican tax, not US tax.

According to the law, US citizens who become residents of Puerto Rico are exempt from any taxation on their Puerto Rican-sourced ordinary income, dividends, or interest, plus long-term capital gains. And they’ll pay no US tax either.

Malta is another example. That country’s debt level is almost as bad as in Cyprus. Yet the government of Malta has recently announced a new citizenship by investment program which could potentially raise billions of euros for the tiny country.

And just over the weekend, Antigua officially joined the ranks of Dominica and St. Kitts as the latest Caribbean nation to offer citizenship by investment.

Antigua is drowning in debt at nearly 100% of GDP. And after spending nearly two years exploring this idea of raising cash by selling citizenship, the Prime Minister formally launched the program over the weekend.

Briefly, foreigners can obtain Antiguan citizenship by investing $400,000 in Antiguan real estate, or $1.5 million in a local business, or merely donating $250,000 to the government.

Other government fees total roughly $60,000 for a single applicant, plus an additional amount for each dependent; it’s possible to apply with your spouse, children under the age of 25, and parents over the age of 65.

Then there’s places like Turks & Caicos– which is in a ‘less desperate’ debt situation, but is still taking proactive steps to raise revenue.

The T&C government has recently reintroduced a ‘permanent residency through investment’ program whereby a foreigner can make investments between $300,000 (for real estate) up to $1.5 million (for a business) and obtain permanent residency in the island nation.

Candidly, all of this is an encouraging sign, and it gives us a glimpse of how the system will be in the near future.

Rather than governments being the enemy of commerce and liberty who treat citizens like milk cows, governments will become interested stakeholders who are forced to compete with one another to attract talented, productive people.

A local council by-election in a small town in the sleepy hinterland of France’s Côte d’Azur would not normally be the stuff to shake national – much less international – politics.

But a decisive victory by the National Front (FN) in Brignoles on Sunday night has set alarm bells ringing in Paris that the far-right party, led by Marine Le Pen, will repeat the feat more widely across the country in municipal elections in March.

Just as ominous, not just for mainstream parties in France but across the EU, is the prospect that the vote signals a much-feared surge by the populist right in European elections due in May.

Fingerpointing

The bickering, finger-pointing and blame-placing events in the wake of the election are rather amusing.

Prime Minister Jean-Marc Ayrault blamed the FN’s win over the centre-right UMP on its leaders “who didn’t lift a finger to defend their candidate”.

Jean-Francois Copé, the UMP’s president, responded that Mr Ayrault should “come to his senses”, saying the result was caused by President François Hollande’s “calamitous” Socialist government, which backed the Communist candidate in Brignoles.

Both parties are afraid that the FN’s campaigns against crime, immigration, Islam, the EU and globalisation are striking a chord with voters at a time of double-digit unemployment and deep disillusionment over the ability of the traditional parties to deal with the country’s problems.

“The FN poison contaminates a whole country and all its politics,” commented Libération, the leftwing newspaper.

Poisoned Policies

Those looking for poisoned economic policies should look no further than the policies of socialist president Francois Hollande. Here are a seven prime examples.

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

Le Pen may be too early, and France may not be that country, but the time will come.

Greece, Finland, Germany, Belgium, and even France are possibilities. All it will take, is for one charismatic person, timing social mood correctly, to say precisely one right thing at exactly the right time. It will happen.

Le Pen was too early in 2011 and 2012. She may be too early still. And France may not even be the right country. But ... "All it will take, is for one charismatic person, timing social mood correctly, to say precisely one right thing at exactly the right time. It will happen."

We have a minor earthquake in France. A party committed to withdrawal from the euro, the restoration of French franc, and the complete destruction of monetary union has just defeated the establishment in the Brignoles run-off election.

It is threatening Frexit as well, which rather alters the political chemistry of Britain's EU referendum.

Marine Le Pen's Front National won 54pc of the vote. It was a bad defeat for the Gaulliste UMP, a party at risk of disintegration unless it can find a leader in short order.

President Hollande's Socialists were knocked out in the first round, due to mass defection to the Front National by the working-class Socialist base. The Socialists thought the Front worked to their advantage by splitting the Right. They have at last woken up to the enormous political danger.

The Front National is now the most popular party in France with 24pc according to a new Ifop poll. Both the two great governing parties of the post-War era have fallen behind for the first time ever. The Gaullistes (UMP) are at 22pc, and the Socialists at 21pc.

I will negotiate over the points on which there can be no compromise. If the result is inadequate, I will call for withdrawal. Europe is just a great bluff. On one side there is the immense power of sovereign peoples, and on the other side are a few technocrats.

Asked if she intended to pull France of the euro immediately, she hesitated for a second or two and then said: "Yes, because the euro blocks all economic decisions. France is not a country that can accept tutelage from Brussels."

Officials will be told to draw up plans for the restoration of the franc. Eurozone leaders will face a stark choice: either work with France for a "sortie concerted" or coordinated EMU break-up: or await their fate in a disorderly collapse.

"We cannot be seduced. The euro ceases to exist the moment that France leaves, and that is our incredible strength. What are they going to do, send in tanks?"

Her four sticking points on EU membership are withdrawal from the currency, the restoration of French border control, the primacy of French law, and what she calls "economic patriotism", the power for France to pursue "intelligent protectionism" and safeguard its social model. "I cannot imagine running economic policy without full control over our own money," she said.

As I wrote in June, the Front has been scoring highest in core Socialist cantons, clear evidence that it is breaking out of its Right-wing enclaves to become the mass movement of the white working class.

Hence the new term in the French press "Left-Le-Penism". She is outflanking the Socialists with attacks on banks and cross-border capitalism. The party recently recruited Anna Rosso-Roig, a candidate for the Communists in the 2012 elections.

Mrs Le Pen's EMU withdrawal plan is based on a study by economists from l'École des Hautes Études in Paris led by Professor Jacques Sapir. It concludes that France, Italy, and Spain would all benefit from EMU-exit, restoring lost labour competitiveness at a stroke without years of depression.

Their working assumption is that the eurozone's North-South imbalances have already gone beyond the point of no return. Attempts to reverse this by deflation and wage cuts must entail mass unemployment and loss of the industrial core.

Prof Sapir said the gains are greatest in a coordinated break-up with capital controls where central bank intervention steers the new currencies to target levels. The model assumes that the D-mark and guilder are held to a 15pc rise against the old euro, while the franc falls 20pc.

The gains are less if EMU collapses in acrimony and currencies overshoot. This would inflict a violent deflation shock on Germany, but would still be strongly positive for the Latin bloc.

I don't wish to get into a debate about whether or not the Front National has genuinely purged its anti-Semites, or whether its immigration and culture policies must inevitably lead to a drastic showdown with France's 5m-plus Muslims. This is a finance blog.

My own impression is that she is more relaxed about gay rights and abortion than she lets on, closer in some ways to the assassinated Dutch populist Pim Fortuyn than to her father Jean-Marie Le Pen, who in turn complains that she picked up "petit bourgeois" views in Paris schools.

The fact is that her campaign of "dédiabolisation" or image detox seems to have worked. Only a minority of voters still thinks the Front is a "threat to democracy". Mrs Le Pen is winning over white working-class women in droves. The feminised Front is no longer the party of the angry white male.

While her father called the Holocaust an historical "detail", she calls it the "pinnacle of human barbarism". I can understand why a lot of people disregard this as cynical repackaging. Parties don't change their character so quickly. But as Socialist advisers have warned Mr Hollande, the game has changed. It is not longer enough to keep insisting that the Front is beyond the pale. There is a new fact on the ground.

I might add that the Front is nothing like Ukip, a mostly pro-American, Right-leaning, libertarian, anti-welfare, free-market party. Marine Le Pen is an ardent defender of the French welfare model. Her critique of capitalism gives her a Leftist hue. Some call it 1930s national socialism, and here we are starting to touch on the populist appeal.

She fulminates against Washington and Nato, calling for France to retake its place as "non-aligned" voice in a multipolar world, and lashing out at the Gaulliste UMP for selling its soul to Europe and the Anglo-Saxon order. "There was a de Gaulle of the Left, and a de Gaulle of the Right. There were two de Gaulles. We stand for both," she said.

The rise of the Front National is yet another reminder that the slow-burn political crisis in Europe has yet to reach its climax. Mass unemployment and the gruelling effects of debt deflation are chipping away at the foundations of the establishment, just as they did in the early 1930s under the Gold Standard, so like EMU today.

France endured the same slow torture then, stoically accepting the "500 deflation decrees" of premier Pierre Laval. That dispensation seemed stable for a while. It was not. The dam broke in 1936 with the once unthinkable of the Leftist Front Populaire, with Communist support. The Gold Standard collapsed.

Angela's Merkel's Fiscal Compact (to use the term broadly) is really just a modern version of Laval deflation. There was no good macroeconomic reason for forcing France to squeeze fiscal policy so violently over the last two years, tipping the economy back in recession. The measures were shoved down France's throat done because austerity for its own sake (without offsetting monetary stimulus) is EMU doctrine, and because France has allowed Germany to call the shots.

We can argue over whether the policy has been counterproductive in economic terms. What is crystal clear is that it has shattered the mould of French politics, opening the door to the Front National.

It is now highly likely that the Front will sweep the European elections next May, a vote perfectly suited to their agenda. It will not be alone. Euro-sceptics look poised to storm the Strasbourg Hemicycle. That will be another fact on the ground.

The worst fears of the EU elites are starting to come true. It is entirely their own fault.

A serious alternative to the dollar is still a long way off, but the latest shenanigans on Capitol Hill have given the search for them renewed momentum

All great empires – from the Greek, to the Roman, the Spanish and the British - have at their heart a dominant means of exchange which is very much part of their political and social hegemony. Once upon a time, it was Roman coinage which was the world's pre-eminent currency. In more recent times it was the British pound. Today, it's the US dollar to which international investors flock as a safe haven for their money. Highly liquid and apparently reliable – until recently at least – nothing else comes even remotely close to the greenback's dominant position in the international monetary system.

That this position – what Giscard d'Estaing referred to as America's "exorbitant privilege" – could so casually be put at risk by politicians on Capitol Hill is an extraordinary spectacle that may be indicative of a great power already seriously on the wane.

With the pound, the fall from grace was swift. Britain emerged from the devastation of the First World War an irreparably damaged economic and military power, with crushing debts and a deeply impaired manufacturing sector.

The dollar was able quickly to usurp the pound's position. Final defeat for sterling came with Britain's decision to leave the gold standard in 1931 – an economically sensible decision but a psychological turning point for sterling from which it never recovered.

Lack of any credible alternative means it won't happen so quickly with the dollar. For all the progress of the last 30 years, China for now remains a much smaller economy than the US and in any case is nowhere near ready financially to assume such a role. As for the euro, the dollar needn't trouble itself much about this one-time pretender to the throne.

Yet rarely before has international dissatisfaction with the dollar's role as reserve currency to the world been as great as it is now. The most visible anger comes from China, with more than $3 trillion of dollar foreign exchange reserves, $1.3 trillion of them held in US Treasuries. For ordinary Chinese, it has come as a revelation to discover they own so much American debt. That they own it in a country which because of political brinkmanship may actually default has provoked understandable fury.

"It is perhaps a good time for the befuddled world to start considering building a de-Americanised world",

China's official government news agency has said.

A steady erosion of trust which began with the financial crisis five years ago has reached apparent breaking point with the pantomime antics on Capitol Hill. The search for long-term alternatives to the dollar is on as never before. Regrettably, there aren't any, or not for the time being in any case. Everyone can only look on in horror as the US commits apparent economic suicide.

Such is the dollar's dominance that, to begin with at least, investors might simply have to take default on the chin.

More than 60pc of global foreign exchange reserves are held in US dollars, which also account for,

More than 80 per cent of global foreign exchange trading.

GLOBAL TRADE LIQUIDITY: So important is dollar liquidity in global trade that if, for instance, you wanted to sell Singapore dollars and buy South African rand, your forex dealer would first typically buy US dollars with your Singapore dollars and then use them to buy the South African rand. The dollar is the middle currency in the vast bulk of international transactions.

RISK FREE COLLATERAL: By the same token, US Treasuries are the very backbone of the global financial system. They are the supposed "risk-free asset" against which everything else is benchmarked, and as such are the collateral of choice in a huge array of financial market transactions.

OIL & GOLD PRICING: The dollar is also the currency used to price most commodities, from oil to gold.

The dollar's hegemony is all pervasive. This has given the greenback a degree of leverage unmatched by any other reserve currency in history. If China starts to sell dollar assets, it will only weaken the dollar, undermining Chinese exports and reducing the value of its remaining portfolio of dollar assets.

I'd been part of the received wisdom that any act of US default would set off a devastating chain reaction of bankruptcies that would provoke a second global financial crisis. But David Bloom, chief currency strategist at HSBC, has convinced me that dollar hegemony might perversely act in the opposite way, at least initially.

Unlike a generalised credit event, where all instruments default at the same time, the US would initially engage in a series of little, self contained defaults, or "selective defaults", whose individual impact would probably not be that great.

Each bond has a life and coupon of its own. The missed coupon payment might therefore be regarded as not so bad – especially as this is a case of "won't pay", rather than "can't pay".

Markets see such defaults differently, with missed payments expected to be made up eventually once a political resolution is found. It's also very likely that the Federal Reserve would attempt to counter the damage in financial markets with more QE, buying up the Treasuries that investors dumped.

Furthermore, the financial uncertainty created by default would likely drive investors towards past safe havens of choice – in particular, US dollar assets. Alternative safe havens, such as Japan and Switzerland, have been rendered defunct by central bank money printing. Ironically, emerging markets are likely be more damaged by default than the US itself, with further capital flight.

Such is the degree of "exorbitant privilege" enjoyed by the dollar that

it might therefore be the first currency in history to (INITIALLY) see an asset price rally on the back of a default.

However, if there were repeated selective defaults, a second, less benign phase would eventually set in. Spooked markets would begin to sell off the dollar.

The consequent stronger euro and pound would have powerfully deflationary consequences for Europe. Internal demand in the US would also collapse as a result of the wrenching fiscal squeeze that would result from federal government attempts to match expenditures with tax revenues.

Dollar hegemony has long been a destabilising force at the centre of the international monetary system; it's a major part of the sharp build-up in global current account imbalances and cross border capital flows that have been at the heart of so many of the problems in the world economy. The unprecedented accumulation of dollar foreign exchange reserves has in turn caused new challenges for the US, making it more difficult to maintain fiscal and financial stability within its own borders.

Policies that may or may not be good for the US are in all probability bad for everyone else. Loose monetary policy in the US since the crisis began has induced unwanted demand and asset bubbles elsewhere in the world.

Serious alternatives to the dollar, such as a global reserve currency, are still a long way off, but the latest shenanigans on Capitol Hill have given the search for them renewed and added momentum.

The US is wrecklessly throwing away its future.

10-16-13

US MONETARY

23 - US Reserve Currency

TO TOP

MACRO News Items of Importance - This Week

GLOBAL MACRO REPORTS & ANALYSIS

US ECONOMIC REPORTS & ANALYSIS

AMERICA - Economy is being fundamentally transformed

22 Reasons To Be Concerned About The U.S. Economy As We Head Into The Holiday Season 10-14-13 Michael Snyder of The Economic Collapse blog,via ZH

Are we on the verge of another major economic downturn? In recent weeks, most of the focus has been on our politicians in Washington, but there are lots of other reasons to be deeply alarmed about the economy as well.

Economic confidence is down,

retail sales figures are disappointing,

job cuts are up, and

American consumers are deeply struggling.

Even if our politicians do everything right, there would still be a significant chance that we could be heading into tough economic times in the coming months.

Our economy has been in decline for a very long time, and that decline appears to be accelerating.

There aren't enough jobs,

the quality of our jobs continues to decline,

our economic infrastructure is being systematically gutted, and

poverty has been absolutely exploding.

Things have gotten so bad that former President Jimmy Carter says that the middle class of today resembles those that were living in poverty when he was in the White House. But this process has been happening so gradually that most Americans don't even realize what has happened.

Our economy is being fundamentally transformed, and the pace of our decline is picking up speed. The following are 22 reasons to be concerned about the U.S. economy as we head into the holiday season...

#1 According to Gallup, we have just seen the largest drop in U.S. economic confidence since 2008.

#2 Retailers all over America are reporting disappointing sales figures, and many analysts are very concerned about what the holiday season will bring. The following is an excerpt from a recent Zero Hedge article...

Chico’s FAS [CHS] Earnings Call 8/28/13:

“Traffic was our issue in quarter two. In a highly promotional and challenging environment, comparable sales result was a negative 2.6 percent on top of a positive 5.6 percent last year and a positive 12.8 percent in 2011.”

William-Sonoma [WSM] Earnings Call 8/28/13:

“The retail environment, it seems to indicate there’s still a lot of uncertainty out there, that the promotional environment has not gone away and that the retail environment in general continues to be choppy, especially with the recent earnings releases and this global unrest, and we just don’t want to get ahead of ourselves.”

Zale Corp [ZLC] Earnings Call 8/28/13:

“Overall, we continue to take a conservative view of market conditions in both the U.S. and in Canada. That being said, we do expect to continue to achieve positive top line growth. We expect store closures will impact our overall revenue growth for the year by about 250 basis points. It represents net closures of approximately 50 to 55 retail locations.”

DSW Inc. [DSW] Earnings Call 8/27/13:

“We did have a traffic decline in Q2, sort of similar to what just about every other retailer in America has reported.”

Guess? [GES] Earnings Call 8/28/13:

“The Korean business continued to be strong as revenue grew in the high single digits in local currency during the quarter. This was offset with the weakness from China, where we are seeing clear evidence of a pullback in consumer spending behavior because of the slowdown in the economy.”

Aeropostale [ARO] Earnings Call 8/22/13:

“Our business trends in the second quarter did not change materially from earlier in the year, which was disappointing given the level of change we registered with the brand. This performance in the third quarter outlook is being influenced by a challenging retail environment, with weak traffic trends and high levels of promotional activity.”

#3 Domestic vehicle sales just experienced their largest "miss" relative to expectations since January 2009.

#20 Former President Jimmy Carter says that the middle class in America has declined so dramatically that the middle class of today resembles those that were living in poverty when he was in the White House.

#21 According to a Gallup poll that was recently released, 20.0% of all Americans did not have enough money to buy food that they or their families needed at some point over the past year. That is just under the record of 20.4% that was set back in November 2008.

#22 Right now, one out of every five households in the United States is on food stamps. There are going to be a lot of struggling families out there this winter, so please be generous with organizations that help the poor. A lot of people are really going to need their help during the cold months ahead.

Secular Bull Market Roadmap: The S&P 500 broke out to new all-time highs in April and has held this breakout. The retest of the prior highs in June confirmed the breakout (prior resistance acted as support) and this is a secular bull market pattern. Holding 1575-1530 keeps this breakout intact.

History of Big Range Breakouts:Upside breakouts from big trading ranges are bullish long-term even if the US equity market pulls back and spends time retesting the upper portion of the secular trading range.

The key question is, are we now 5 years into a 1982 – 2000 type of a secular bull market, or is this merely a post 1973-74 bounce?

10-19-13

PATTERNS

ANALYTICS

PATTERNS - While Everyone Was Worrying About the US and Washington ....

EUPHORIA

REALITY

EU MacroData - Has been sliding since the start of September and has plunged recently to 3 month lows

EU Surprise Index - Rolling Over

DRIVER$

EURJPY - Being Driven by Japanese Carry Trade

A Consistent Daily Correlation - Any Drop in the EURO and a RISK-OFF Happens!

Been Watching the EU Peripherals Lately?

Bad loans across Spanish banks amounted to $247 billion in August - a new record-breaking 12.12% of all loans outstanding (now 30% higher than any previous crisis in the history of Spain). Credit creation continues to implode with a 12.3% plunge in total loans outstanding but of course, none of that matters (for now), as Spanish bond spreads (and yields) press back towards pre-crisis lows...

10-19-13

EU

ANALYTICS

PATTERNS - Perception (prices) and Reality (value) has grown too wide

If only bellwether stock IBM hadn't indicated that earnings hopes for global tech were in the toilet, the world could be celebrating a new Dow record too. What a day... with

Stocks tractor-beaming up to the Fed's balance sheet year-end target of 1800 for the S&P 500;

.... even the talking heads are lost in explaining the charade.

The box that the Fed has put itself in is becoming obvious for all to see -

there is no argument that this is 'fundamentals' and so the Fed knows it can never leave as the wedge between perception (prices) and reality (value) has grown too wide...

Low volumes in stocks on an all-time high day hardly support anything but doubt as 'safety' is sought in bonds and bullion.

New record highs in S&P 500 and Russell 2000; despite a 70 point drag from IBM, the Dow managed to get back to unchanged!!

The S&P 500 is up 5.3% from last week's lows - that is the best 6-day run since Dec 2011...

Still wondering how it's all possible? Surprised at the rise given not one of your peers is putting fresh capital to work in the markets? Once again, it's all about the marginal carry-based buyer driving up stocks at the algo-driven edge...

On Thursday. we had a huge up day, with US markets gaining ~2%. Some folks credited the possibility of a debt ceiling deal, while others called it a low volume short covering rally. Regardless, it was substantial, and should not be ignored.

As the table above showed, these 90/90% up days– when 90% of stocks on the NYSE are up and 90% of the shares traded are to the upside — the tendency is towards higher future returns in the ensuing weeks and months.

As you can see in the table above, 20, 30 and even 65 days after a 90/90 day, markets are higher at least 70% of the time. Under normal circumstances, that range would be low 60% range. In other words, the odds of gains improves some 10% over normal following a 90/90 day in our time period (20, 30 or 65 days from 2007-present) .

Here’s Merrill’s Stephen Suttmeier:

“That big buying the US equity market opened strong with a 90% up day (at least 90% of stocks on the NYSE up on at least 90% up volume) and the equity market maintained this 90% up day into the close.

This is bullish and was the first 90% up day since the pair of 90% up days from 12/31/12 and 1/2/13. We have data on 90% days going back to January 2006. Since then 90% up days have occurred only 3.3% of the time, but after a 90% up day, the S&P 500 has well above average 10, 20, 30, and 65 day returns and this supports the case for a year-end rally. For example, the 65-day S&P 500 return after a 90% up day is 4.9% vs. an average 65-day return of 1.4%. Interestingly, the 1, 2, and 5-day returns for a 90% up day are below average and negative. This suggests buying into a short-term dip after a 90% up day.”

That 14% edge over 65 days isn’t a sure thing, but it is quite statistically significant . . .

Source:
A 90% up day is bullish & the stats support a year-end rally
Merrill Lynch Bank America, October 11 2013
Stephen Suttmeier

The last few days have seen a great rotation in T-Bill markets. That rotation, as the chart below shows, has seen short-dated Bills rally as the new "deal" became closer and closer but the mid-term Bills start to crack higher in yield.

T-Bill yield change from last week as deal rumors began... the risk is now in the market and won't escape until the can is kicked infinitely far away - until then it will sloosh along the maturities as we approach the deadlines...

Based on press reports, the short-term debt ceiling extension expected to be passed by Congress would suspend the debt ceiling until February 7.

However, as Citi notes,

Feb. 7 would only be a "soft" deadline since Treasury would then be able to engage in "extraordinary measures" to open up "headroom" under the debt ceiling.

These measures may be worth around $200 billion of additional debt capacity. Based on a rough estimate, described below, we think the new "hard" debt-ceiling deadline, when Treasury is at risk of being unable to pay all its obligations, is likely to be in March 2014.

We base our rough estimate on the historical experience in 2013. Starting Feb. 7, 2013, Treasury ran a $144 billion cumulative deficit through Feb 28, 2013 and $270 billion cumulative deficit through April 1. Roughly speaking, if cash-flows in 2014 are similar to 2013, this would put the "hard" ceiling date under the proposed plan in March 2014.

The problem - introduced into the market by this most recent debacle - is that until the can stops being kicked (or is kicked infinitely), the politicians have made hundreds of billions of dollars in T-Bills "haircuttable" - i.e. not 100% money equivalent... and that naturally reduces the velocity of the collateral and rehypothecation, acting as a drag on risk (though we are sure the Fed will do its best to fill the broken "market" void)

Next up: the BLS random number generator starts cranking again and informing everyone in just how sorry a state the economy finds itself, which of course is bullish for stocks because it means that the taper is indefinitely delayed, potentially until June 2014. Also next up, as the emergency Treasury measures are netted out against the new debt limit, it means that once the new Daily Treasury Statement hits, the total US Federal debt will be just at, or over $17 trillion. Rejoice.

Finally - see you all again here in three months. In the meantime the interim status quo is as follows:

The government will be reopened through January 16

The debt ceiling has been lifted through February 7, while the Treasury is allowed to use its assortment of emergency measures to delay running out of funds, which means the next true X-Date will hit sometime in April

The House and Senate budget conference must real a deal by December 13, but it may very well not achieve anything.

Government workers get back pay for 16 days, and tomorrow return from a 2 + week vacation.

The only thing that was actually "achieved" as a result of the government shutdown is to have income verification for Obamacare beneficiaries: something which should have been embedded in the ACA from the beginning.

During debate on the bill, Republicans focused on the tasks ahead, particularly the upcoming budget conference. House Appropriations Committee Chairman Hal Rogers (R-Ky.) said he expects the two sides will be able to find a deal on 2014 spending levels, and is hoping for entitlement and tax reform.

"I'm optimistic that once this resolution has passed, the House and the Senate will come together in a budget conference to work out our broad fiscal and budgetary challenges," he said in comments on the floor.

One immediate test for negotiators is finding a way to reconcile Democratic demands for new tax revenues, and GOP opposition to any new taxes. For several months now, House Republicans have refused to meet with Democrats on the budget because of these Democratic demands.

House Minority Leader Nancy Pelosi (D-Calif.) offered a glimpse into this upcoming fight late Wednesday, saying on the House floor that Democrats will fight to increase spending above the 2013 sequester levels.

"As we know, this number is too low," she said. "As even the chairman of the committee has said, it's an unrealistic and ill-conceived number, and must be brought to an end."

The final deal was negotiated by Senate Republican Leader Mitch McConnell (Ky.), who began an intense round of negotiations with Majority Leader Harry Reid (D-Nev.) at the end of last week after House Republicans proposed legislation to raise the debt ceiling while leaving the government shuttered.

Senate Republicans failed to win a delay of the law's medical device tax, which many wanted, but claimed a sliver of victory by keeping current spending levels locked in place for three more months.

Judging by the plunge in IBM stock after hours (accounting for a major portion of the Dow Jones Non-industrial Average Index), the CFO can't pay shareholders with hopium and rumors. The reason: while IBM beat EPS modestly with a very adjusted bottom line of $3.99, beating estimates of $3.96, driven mostly by this: "IBM’s tax rate was 16.0 percent, down 8.6 points year over year" (assuming a flat tax rate Y/Y, GAAP EPS would plunge from $3.68 to $3.30), it was revenues - that ongoing 2013 horror story for the "stawk" and economic "recovery" - that was the problem, because instead of printing at $24.74 billion where it was expected, sales missed by a whopping $1 billion, or $23.72 billion. Of note: while America revenues of $10.3 billion dropped just 1%, and Europe was actually up 1%, it was the all important China and Japan, i.e. Asia-Pacific, where revenues cratered by an unprecedented 15%! So much for both Abenomics and the Chinese "recovery." And what's worse, the Emerging Market callamity of Q3 finally took a big bite: "Revenues in the BRIC countries — Brazil, Russia, India and China — were down 15 percent." Time to push the global recovery myth to the 4th half of 2013 (the third half is where the government shutdown will be squeezed).

And so on. At least the company did not blame this latest Q3 earnings fiasco on the Q4 government shutdown or partly-sunny, sometimes overcast weather.

End result: stock plunging after hours to fresh 2 year lows. Maybe Buffett should stick to banks and other crony capitalist government-bailout specials in the future.

10-17-13

EARNINGS

MACRO

EMERGING MARKETS

ANALYTICS

PATTERNS - The Carry Trade Driver$

To understand the SPX it is important to understand how directly the Japanese Carry Trade is currently driving global liquidity and fund flows. The correlation between the EURJPY is presently as strong a correlation as you are likely to encounter.

Though money (leverage) is flowing into the US Equity markets it is nowhere close to what is occurring in other areas. Consider the EU:

15th Straight Week of Inflows to EU Equity Funds

Best Run in 11 Years

There is a Potential Blow Off Top

WHEN the US Event Risk clears!

We have also spoke of the AUDJPY correlation for the very short term trader. Here is this moringis pre-open chart for Tuesday 10-15-13 for your refererence.

It would appear when this occurs that the Japanese Carry will then most likely shift to both US Equities and Bonds (see Credit for approaching Bond Reversal).

The latest Q2 US Flow of Funds data revealed that the corporate financing surplus declined to zero, for the first time since the Lehman crisis. The financing surplus is a measure of corporate savings, and in principle the lower this financing surplus the more expansionary the corporate sector is. Typically the corporate sector is dis-saving, i.e. capex typically exceeds cash flows from operations. However, the sharp decline in the US corporate surplus is less positive than it appears at first glance because it was driven by a rise in dividend payments rather than a rise in capex. As we have pointed out time and again, with the Fed's ZIRP, the only thing that matters is the share price and with firms increasingly focused on dividends rather than capex, to the extent that it continues, points to lower productivity and potential growth going forward.

In other words - as we warned 18 months ago,

the most insidious way in which the Fed's ZIRP policy is now bleeding not only the middle class dry, is forcing companies to reallocate cash in ways that benefit corporate shareholders at the present, at the expense of investing prudently for growth 2 or 3 years down the road.

The latest release of US Flow of Funds for the second quarter of 2013 revealed that the corporate financing surplus, i.e. the gap between available cash flows from operations (net of taxes and dividends) minus capex declined to zero for the first time since the Lehman crisis (Figure 1). The financing surplus is a measure of corporate savings, and in principle the lower this financing surplus the more expansionary the corporate sector is.

Typically the corporate sector is dis-saving, i.e. capex typically exceeds cash flows from operations. Since 1952, when US Flow of Funds data begin, it has been only during US economic recessions when this financing surplus was positive. So although a decline in the corporate surplus to zero is an encouraging sign, its level remains above the typical negative levels seen during mid phases of economic expansions.

Also it remains to be seen whether the US surplus decline will be followed by the rest of G4 countries which are set to release Q2 Flow of Funds by the end of this month. As shown in Figure 1, the corporate financing surplus for the whole of the G4 had been rising during 2012 up until the first quarter of this year.

What drove the decline in the US corporate surplus to zero?

Figure 2 shows that this decline was driven by a fall in available cash flows, i.e. undistributed profits net of taxes. Capex increased only marginally in Q2. In turn, the decline in available cash flows was caused by a sharp rise in dividend payments in Q2. Dividends payments jumped to a record high of $163bn in Q2, 35% above the pace of the previous four quarters. Relative to nominal GDP, dividend payments returned to the record highs last seen at the end of 2006.

We see two implications from the above flows:

1) the sharp decline in the US corporate surplus is less positive as it appears at first glance because it is driven by a rise in dividend payments rather than a rise in capex, and

2) these flows reinforce a long term shift of the US corporate sector away from capex towards dividends. Figure 3 shows this long term trend over time.

Dividends have started rising vs. capex since early 1980s. The Q2 reading matches the record high seen in 2004. A focus on dividends rather than capex, to the extent that it continues, points to lower productivity and potential growth going forward.

This latest update from JPMorgan merely confirms what we foresaw,

The conclusion of all this is quite simple: the longer the "recovery" continues, without an actual recovery being coincident, and all is merely a game of optics and smoke and mirrors, corporate margins will start collapsing in a toxic spiral, whereby companies generate less cash, and have less cash to spend on CapEx, etc, until the next sector needing a Fed bailout is the corporate one, all the while the Fed's forced misallocation of resources forces companies to expend every available penny into dividend payouts.

...

Not accounting for accumulating and rising depreciation, or as we said, "we get back to what we have dubbed the primary cause of all of modern capitalism's problems: a dilapidated, aging, increasingly less cash flow generating asset base! Because absent massive Capital Expenditure reinvestment, the existing asset base has been amortized to the point of no return, and beyond.

The problem is that as David Rosenberg pointed out earlier, companies are now forced to spend the bulk of their cash on dividend payouts, courtesy of ZIRP which has collapsed interest income.

It also means far, far less cash for CapEx spending. Which ultimately means a plunging profit margin due to decrepit assets no longer performing at their peak levels, and in many cases far worse.

Reiterating what we said above, the most insidious way in which the Fed's ZIRP policy is now bleeding not only the middle class dry, is forcing companies to reallocate cash in ways that benefit corporate shareholders at the present, at the expense of investing prudently for growth 2 or 3 years down the road.

The chart above shows the extent of what has become an amazing development in global markets in 2013: favor has turned toward European equities in a big way after years of what have mostly been outflows from the asset class.

This summer, economic data in the eurozone began to turn up, and the euro-area economy finally rose out of the recession it had been stuck in since 2011.

Investors were quick to pile into European stocks. Now, we're even seeing banks recommending clients rotate out of U.S. equities and into their European counterparts, as Société Générale asset allocation strategists did in a bearish call on U.S. stocks last week.

In a note to clients, BofA Merrill Lynch investment strategists led by John Bilton sum up their views toward the Europe trade at the moment:

Europe is everybody’s darling, but is the honeymoon over?

15 weeks of inflows to Europe is the best winning streak in 11 years. PMs we’ve met in the past month are more constructive than we’ve seen them since the start of the crisis. “Long Europe” is popular, but it may be more a verbal consensus than a practical one – real money is just starting to buy, only 1/7th of cumulative outflows since 07 have reversed, and many investors are wanting to call the top.

Despite the flows a drop in event risk may push SX5E >3000

We are mindful of how far prices, flow and sentiment have run. We also note that indices can see ‘blow off tops’, especially when PMs start to try and fade strength. Resolution of the US shutdown and debt ceiling debate, or good earnings data from EU firms this week, could push SX5E >3000 for the first time since May-11.

But 3Q & 4Q remain the ‘show me’ quarters for EU earnings

We remain structural bulls on Europe but do acknowledge that all of the 45% rally in SX5E since Jun-2012 lows is from rerating. The next two earnings seasons are Europe’s ‘show me’ quarters. Steep yield curves, easing working capital financing, low inventories and rising utilisation rates should kickstart a restocking cycle, in turn boosting EPS. Firms that disappoint in this environment will be vulnerable.

US drives near term move; EU earnings sets long term trend

The US shutdown remains in focus; markets will be sensitive in both directions to newsflow. VIX is back to pre-shutdown levels so nervous PMs will find put options less painful to carry. EPS revisions still favour domestic EU and financials; while staples, industrials and chems may be vulnerable as EU earnings season begins.

The Euro Stoxx 50 (SX5E) has risen 18.5% since June 24.

Europe's Lies Are So Bad, They Make the US Look Good Comparison 10-15-13 Graham Summers

While the US continues to bumble its way towards a debt ceiling crisis (somehow our President doesn’t have time to meet work on solving this, butdoes have time to make sandwiches with volunteers and give press statements about how we wants to work), Europe continues to make us look good by comparison.

Remember how we were told time and again that Europe was saved? Remember how repeatedly we were told that the European Central Bank (ECB) would do “whatever it takes” to fix things?

Turns out all of that was a total load of BS. Indeed, the IMF just announced the following:

Nobody knows the true scale of potential losses at Europe's banks, but theInternational Monetary Fund hinted at the enormity of the problem this month, saying that Spanish and Italian banks face 230 billion euros ($310 billion) of losses alone on credit to companies in the next two years.

Yet five years after the United States demanded its big banks take on new capital to reassure investors, Europe is still struggling to impose order on its financial system, having given emergency aid to five countries.

Remember, Spain was the banking system that was great right up until it demanded a 100 billion Euro bailout. Then only six months later, one of its largest problem banks (which had taken 18 billion Euros in bailout funds) announced it still had a negative valuation.

The entire EU banking system is insolvent. Unlike the US where the banks raised capital to address their problems, EU banks have not raised capital nor have they reduced their leverage (of 26 to 1 by the way). Instead, they’ve simply swapped garbage assets as collateral to the ECB, which counts this garbage at 100 cents on the Euro, and issues liquidity to the banks.

The whole thing is one giant lie. You have banks lying about what they own to the ECB which lies about the real risk of the banks which swaps out debt from EU countries that are lying about their finances in exchange for free money so the banks can keep lying.

Honestly, this whole mess makes the US look good by comparison. The bad loans, leverage and every other negative issue is worse for EU banks than for the US.

Makes you wonder why investors are piling into EU financials, doesn’t it? In general share prices in this space have doubled since the 2012 lows. The fact they’ve doubled on a colossal lie doesn’t bode well.

I expect we’ll see the European banking crisis back with a vengeance in the first half of 2014. Now that the German elections are over and Merkel has won, the “reality” of Europe should start leaking out (it’s not coincidence that the IMF released this report about Spanish and Italian bank woes just now after the German election as though this was suddenly “news”).

Stock markets worldwide are faced with the same issue of declines in listings that surfaced in the U.S. a decade and a half ago. The reasons for the contagious collapse in publicly listed entities is unclear (increasing acquisitions, LBOs, filing for bankruptcy, and declines in IPO volumes) but as Bloomberg reports, "the decline in public equities is unquestionable and should be of grave concern to both investors and policy makers alike," CFA Institutes' Jason Voss noted adding - crucially, "having fewer listings may hamper asset allocation, make stocks too expensive and send improper signals to companies looking to go public."

European markets listed the most stocks in 2007, when a bull market ended. The total fell 23 percent during the next five years.

Asia-Pacific listings peaked in 2010, and last year’s figure was 4.7 percent lower.

Stock listings in the U.S. reached their highest total in 1997, in the midst of a bull market fueled by demand for shares of Internet companies. Last year’s figure was 47 percent lower than the record.

Many trading strategies centered on Oct. 17, the date on which the government is projected to run up against its debt limit. Few expect the government to default, but as the clock ticks down, many investors are expecting widespread fear will drive investors to dump stocks and other risky assets, as they did during the last debt ceiling standoff in August 2011.

The rate the government pays to borrow for a month rose to its highest level in five years, following a $30 billion Treasury bill auction that Bank of America Merrill Lynch head of U.S. rates strategy research Priya Misra deemed "awful."

The cost of hedging for a year against a possible U.S. default via credit default swaps rose as much as 10%. The price of one-year U.S. CDS has risen 10-fold since Labor Day.

In the stock market, major indexes slid, with the Dow Jones Industrial Average marking its 11th drop in 14 trading sessions.

The Chicago Board Options Exchange's Volatility Index—the stock market "fear gauge"—jumped to within a fraction of its highest level this year, reflecting rising demand for stock options affording protection from extreme price movements. The VIX is up 22% since the shutdown began Oct. 1.

Washington Budget/Debt Ceiling negotiations brokedown over the weekend. This followed a 500 point upward move in the DOW in a 48 hour period based simply on indications talks were occuring and were "positive".

THROUGH WHAT INSTRUMENTS DID THE MARKETS REACT

n a world in which only the central banks' balance sheets matter, and everything, when stripped of its product complexity, is simply a derivation of a cheap money carry trade, as can be seen on the chart below showing the correlation between the the ES and the EURJPY which have become interchangeable...

... then the futures open in 4 hours should be interesting following the early weakness in both EURJPY and USDJPY.

Interesting because the implied 15 point ES drop in futures as of the early indications...

... is hardly the large enough drop that is needed to once again the GOP in either the House or the Senate to scramble and get a deal done, following the recent two-day epic surge in the market on hopes that deal concerns would no longer be an issue.

As we observed four hours ealier, the EURJPY-implied futures open suggested an immediate 15 points of downside. Sure enough, ES has just opened for trading some 15 points lower to start. Where it ends the overnight session, however, now that the NY Fed and BIS trading desks have both been called in for an emergency overnight session, is a different matter entirely.

It would seem equity futures are working their way back down to the level of risk T-Bills have been threatening. Cash treasury markets are not open yet but futures imply around a 2-3bps compression in yield - we can only imagine where T-Bill yields will break....

Charts: Bloomberg

10-14-13

DRIVER$

ANALYTICS

THESIS Themes

2013 - STATISM

STATISM - Americans Have Lost VIRTUALLY ALL of Our Constitutional Rights

This post explains the liberties guaranteed in the Bill of Rights – the first 10 amendments to the United States Constitution – and provides a scorecard on the extent of the loss of each right. (This is an updated version of an essay we wrote in February. Unfortunately, a lot of information has come out since then.)

First Amendment

The 1st Amendment protects speech, religion, assembly and the press:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

The Supreme Court has also interpreted the First Amendment as protecting freedom of association.

Like many academics, I was happy to blissfully ignore the Second Amendment. It did not fit neatly into my socially liberal agenda.

***

It is hard to read the Second Amendment and not honestly conclude that the Framers intended gun ownership to be an individual right. It is true that the amendment begins with a reference to militias: “A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms, shall not be infringed.” Accordingly, it is argued, this amendment protects the right of the militia to bear arms, not the individual.

Yet, if true, the Second Amendment would be effectively declared a defunct provision. The National Guard is not a true militia in the sense of the Second Amendment and, since the District and others believe governments can ban guns entirely, the Second Amendment would be read out of existence.

***

More important, the mere reference to a purpose of the Second Amendment does not alter the fact that an individual right is created. The right of the people to keep and bear arms is stated in the same way as the right to free speech or free press. The statement of a purpose was intended to reaffirm the power of the states and the people against the central government. At the time, many feared the federal government and its national army. Gun ownership was viewed as a deterrent against abuse by the government, which would be less likely to mess with a well-armed populace.

Considering the Framers and their own traditions of hunting and self-defense, it is clear that they would have viewed such ownership as an individual right — consistent with the plain meaning of the amendment.

None of this is easy for someone raised to believe that the Second Amendment was the dividing line between the enlightenment and the dark ages of American culture. Yet, it is time to honestly reconsider this amendment and admit that … here’s the really hard part … the NRA may have been right. This does not mean that Charlton Heston is the new Rosa Parks or that no restrictions can be placed on gun ownership. But it does appear that gun ownership was made a protected right by the Framers and, while we might not celebrate it, it is time that we recognize it.

The gun control debate – including which weapons and magazines are banned – is still in flux …

Third Amendment

The 3rd Amendment prohibits the government forcing people to house soldiers:

No Soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law.

While a recent lawsuit by a Nevada family – covered by (Mother Jones, Fox News and Courthouse News – alleges violation of the Third Amendment, this appears to be an isolated incident and an aberration.

So we’ll count this as an Amendment which is still being honored! Score one for We the People!

Fourth Amendment

The 4th Amendment prevents unlawful search and seizure:

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

Fifth Amendment

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

As such, the government is certainly depriving people of life, liberty, or property, without due process of law.

There are additional corruptions of 5th Amendment rights – such as property being taken for private purposes.

The percentage of prosecutions in which a defendant is denied a grand jury is difficult to gauge, as there is so much secrecy surrounding many terrorism trials.

Protection against being tried twice for the same crime after being found innocent (“double jeopardy”) seems to be intact. Hey … that’s two Constitutional rights which are still intact!

Sixth Amendment

The 6th Amendment guarantees the right to hear the criminal charges levied against us and to be able to confront the witnesses who have testified against us, as well as speedy criminal trials, and a public defender for those who cannot hire an attorney:

In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defence.

Subjecting people to indefinite detention or assassination obviously violates the 6th Amendment right to a jury trial. In both cases, the defendants is “disposed of” without ever receiving a trial … and often without ever hearing the charges against them.

More and more commonly, the government prosecutes cases based upon “secret evidence” that they don’t show to the defendant … or sometimes even the judge hearing the case.

Seventh Amendment

The 7th Amendment guarantees trial by jury in federal court for civil cases:

In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.

As far as we know, this right is still being respected (that’s three rights still being followed).

While Justice Scalia disingenuously argues that torture does not constitute cruel and unusual punishment because it is meant to produce information – not punish – he’s wrong. It’s not only cruel and unusual … it is technically a form of terrorism.

And the federal government is trampling the separation of powers by stepping on the toes of the states and the people. For example, former head S&L prosecutor Bill Black – now a professor of law and economics – notes:

The Federal Reserve Bank of New York and the resident examiners and regional staff of the Office of the Comptroller of the Currency [both] competed to weaken federal regulation and aggressively used the preemption doctrine to try to prevent state investigations of and actions against fraudulent mortgage lenders.

Indeed, the federal government is doing everything it can to stick its nose into every aspect of our lives … and act like Big Brother.

Conclusion: While a few of the liberties enshrined in the Bill of Rights still exist, the vast majority are under heavy assault.

As thethe preamble to the Declaration of Independence shows, the American government is still carrying out many of the acts the Founding Fathers found most offensive:

He has kept among us, in times of peace, Standing Armies without the Consent of our legislatures. [Background]

He has affected to render the Military independent of and superior to the Civil power. [Background here, here and here]

***

He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation: [Background]

***

For transporting us beyond Seas to be tried for pretended offences [Background]

***

He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation and tyranny, already begun with circumstances of Cruelty & perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the Head of a civilized nation. [Background]

***

He has abdicated Government here, by declaring us out of his Protection and waging War against us. [Background here, here and here]

Things that can’t go on, the prophet Herb Stein once observed, go on until they can’t. Criticality eventually bushwhacks credulity. The aggregation of rackets that American life has become is rolling over like a great groaning wounded leviathan and the rest of the world is starting to freak out at the spectacle. Instead of a revolution, we’re having a suicide party.

But don’t worry, a revolution would not be far behind. My guess is that it would kick off as generational rather than regional or factional, but it would eventually incorporate all three. A generation already swindled by the college loan racket must be chafing at the bureaucratic nightmare that ObamaCare instantly turned into at its roll-out, with a website that wouldn’t let anyone log in. Isn’t technology wonderful? I wonder when the “magic moment” will come when all those unemployed millennials join a Twitter injunction to just stop paying back their loans. If that particular message went out during this month’s government food fight, it would do more than just get the attention of a few politicians. It would crash the banks and snap the links in every chain of obligation holding the fiasco of globalism together.

So far, the millennials have shown about as much political inclination as so many sowbugs under a rotten log, but it is in the nature of criticality that things change real fast. In any case, the older generations have completely disgraced themselves and it is only a question of how cruelly history will treat them in their unseating. The last time things got this bad, the guys in charge divided into two teams with blue and gray uniforms, rode gallantly onto the first fields of battle thinking it was a kind of rousing military theatrical, only to find themselves in a grinding four-year industrial-scale slaughter in which it was not uncommon for 20,000 young men to get shot to pieces in a single day — one day after another.

Of course, things are a bit different now since we became a nation of overfed clowns dedicated to getting something for nothing, but despite the abject futility of American life in its current incarnation, there is room for plenty of violence and destruction. The sad and peculiar angle of the current struggle is that both sides in government wish heartily to keep all the rackets of daily life going — they just disagree on the distribution method of the vig.

What amuses me at the moment is the behavior of the various financial markets and the cockamamie stories circulating to explain what they are doing in this time of perilous uncertainty. One popular story is called “the energy renaissance.” This is a fairy-tale that pretends that we have enough oil at a cheap enough price to keep driving to WalMart forever. Of course, shale oil wells that cost $12million to drill and produce 80 barrels-a-day for three years before crapping out altogether do not bode well for that outcome, but the wish to believe over-rides the reality. Another laughable story du jour is “the manufacturing renaissance.” This story proposes that the “central corridor” of the USA, from North Dakota to Texas, is about to give China a run for its money in manufacturing. The catch is that any new factory opening up in this scenario will be run on robots — leaving who, exactly, to be the customers paying for what these factories produce? Think about it for five minutes and you will understand that it is just a story calculated to goose up a share price here and there, and only for moment until it is discovered to be just a story. What interests me most is what happens when the stories lose their power to levitate the legitimacy of the people who tell them.

Well, Christine LeGarde, chief of the IMF, tried to read the riot act to the American clownigarchs over the weekend, but they’re not paying attention to her. What has she done for her own country, France, lately anyhow. They’ve got their own set of rackets running over there. The Chinese are getting a little prickly, too, since they are sitting on a few trillion in US promises to pay cash money in the not so distant future. The Chinese are beginning to apprehend that future perhaps never arriving.

In case you haven’t heard: America is “in recovery.” We can play all the games we want with money, or what passes for money these days. And then the moment will come when we can’t. That moment begins to feel creepily close.

The U.S. Justice Department has opened a criminal investigation of possible manipulation of the $5.3 trillion-a-day foreign exchange market, a person familiar with the matter said.

The Federal Bureau of Investigation, which is also looking into alleged rigging of interest rates associated with the London interbank offered rate, or Libor, is in the early stages of its currency market probe, said the person, who asked not to be identified because the inquiry is confidential.

***

Swiss regulators last week said they were “coordinating closely with authorities in other countries as multiple banks around the world are potentially implicated.”

The U.S. investigation comes as the U.K. Financial Conduct Authority said in June it was reviewing potential manipulation of exchange rates.

***

Earlier this week, European Union antitrust regulators said they were examining the possible manipulation of currency rates by the financial industry, while Switzerland’s Financial Market Supervisory Authority, or Finma, and the nation’s competition commission said they were probing similar potential wrongdoing.

The U.S. Commodity Futures Trading Commission has also been reviewing possible currency market rigging, said a separate person with knowledge of the matter.

***

RBS, Deutsche Bank and Citigroup are among firms reviewing e-mails, instant messages and phone records of their foreign-exchange employees for evidence of potential manipulation, according to three people with knowledge of those probes.

The Big Picture

The government has given the banks huge subsidies … which they are using for speculation and other things which don’t help the economy. In other words, propping up the big banks by throwing money at them doesn’t help the economy

Tipping Points Life Cycle - ExplainedClick on image to enlarge

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